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Yum fueled by brand turnarounds

Pizza Hut and KFC improve same-store sales while Taco Bell breakfast gains traction

Yum! Brands Inc. got all three of its brands heading in the right direction in the fourth quarter ended Dec. 26, at least in its home U.S. market.

KFC, Pizza Hut and Taco Bell all reported improving sales during the quarter. That’s encouraging for the Louisville, Ky.-based company that will rely on the U.S. market more in the near future, as Yum prepares to spin off its China operations to concentrate on being a “pure-play” franchisor.

“It was our best quarter in three years,” Yum CEO Greg Creed said of the U.S. business during the company’s earnings call Thursday.  

Pizza Hut, Yum’s struggling pizza chain, saw U.S. same-store sales grow 2 percent in the fourth quarter. Executives said the chain is working to continue to improve sales, with a focus on operations and improvements in its digital capabilities.

“Pizza Hut in the U.S. is starting to turn a corner,” Creed said. “We’re making it easier to get better pizza.”

Creed also said that Pizza Hut “reached an important agreement with our U.S. franchisees” to start overhauling the chain’s assets, including replacing ovens inside units and upgrading in-store technology.

Pizza Hut is the largest pizza chain in the U.S. based on domestic systemwide sales. Systemwide sales at the chain grew 1 percent last year, according to the company’s earnings report.

Pizza Hut has lost some market share in recent years to competitors, notably Domino’s Pizza Inc. and Papa John’s International Inc., both of which increased sales by emphasizing digital ordering capabilities.

Pizza Hut is also working to lure customers with lower prices. Last month the chain introduced its $5 Flavor Menu, which gives customers a choice of a medium one-topping pizza, eight boneless chicken wings, a chocolate chip cookie or triple chocolate brownie, Tuscani Pasta, breadsticks or four 20-ounce drinks for $5 each when ordering two or more items.

The chain is also marketing its premium products, including a Stuffed Garlic Knots Pizza.

“We believe we have the right strategy going forward,” Creed said. “I’m very encouraged by the start of 2016 for Pizza Hut.”

Meanwhile, Taco Bell continues to gain traction, particularly at breakfast, where transactions grew by 6 percent in the fourth quarter, Creed said. That was twice the growth rate of the business as a whole.

Same-store sales at Taco Bell grew 4 percent, and have risen 10 percent on a two-year basis, company executives said.

“Taco Bell had a fantastic 2015,” Creed said, noting that the chain’s systemwide sales surpassed $9 billion during the year.

Taco Bell will announce a major new product in a commercial to air during the first half of the Super Bowl on Sunday. Executives haven’t indicated what that product would be, but reports say it is the Quesalupa, which features a cheese-stuffed shell and has been tested in Toledo, Ohio. Nomura analyst Mark Kalinowski wrote in a note that the “nationwide launch of the Quesalupa begins shortly,” and said that it tested well in Toledo.

KFC same-store sales grew for the sixth consecutive quarter in the U.S., an encouraging turnaround for a chain that had lost significant ground in recent years to Chick-fil-A and Popeyes Louisiana Kitchen. Same-store sales increased 3 percent in the quarter, and 8 percent on a two-year basis.

While Yum Brands’ concepts gain traction in the U.S. and elsewhere in the world, performance was mixed in China.

Yum is moving ahead with plans to spin off its China operations, which are primarily company-owned. The spinoff is expected to be complete by the end of the year, CFO Pat Grismer said during the company’s earnings call.

Creed called the separation “the biggest strategic move in the history of the company,” that will turn Yum into two separate, large, independent companies with “unique investment profiles.” Yum Restaurants China will operate restaurant brands in China and will pay a licensing fee to Yum Brands to run Yum’s concepts. It will be primarily a franchisee-operated company.

Yum now has more than 5,000 KFC restaurants in China, and more than 7,000 locations there overall.

Same-store sales at KFC in China increased 6 percent during the quarter as the chain continued to recover from a pair of food safety incidents.

But Pizza Hut has suddenly begun to struggle in China. Same-store sales fell 8 percent for the fourth quarter, and 5 percent for the year. Yum Brands executives blamed the weakened economy for the issues, and said they are moderating the chain’s development pace for now.

“We have our work cut out for us here,” Creed said, noting that sales continued to improve at KFC in China in January, but “Pizza Hut remains soft.”

Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze

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